In 2009, the government passed legislation that would allow Canadians an alternative method of saving for retirement. The TFSA was introduced to give people more flexibility with their money. As you know with RRSP’s, that money is generally locked in until retirement, that is of course you are willing to pay back the tax savings that you received when you took the RRSP deduction on your taxes. Generally speaking, the TFSA is more of a “pay as you go” type of retirement savings plan. What this means is that usually with RRSP’s, you get a tax deduction now. Then in the future, you would may back those tax savings at a time when your income is expected to be low, which generally creates an overall tax savings over the long term period. That is the main advantage for RRSP’s. With TFSA’s, you aren’t allowed a deduction on your taxes. Hence, no tax deferral. The main advantage for having a TFSA is the long-term savings with interest income. All interest income in a TFSA is tax free. Conversely with an RRSP account, once you pull the money out, the excess interest income could be subject to tax depending on your personal tax bracket when you do. In addition to this benefit, the other main benefit of a TFSA is the fact that you have easy access to your cash. Should you need the cash you can take it without penalty. Furthermore, you can put the money back into your TFSA account at a later date without losing overall contribution room (Just be wary of the rules!).

Currently, each individual in Canada over 18 years of age was and is allowed the following contribution room:

2009 – $5,000
2010 – $5,000
2011 – $5,000
2012 – $5,000
2013 – $5,500

A current accumulated total of $25,500 is allowed to be set aside as of today, if you have never made contributions before. This is ongoing, so expect further room of approximately $5,000 per year going forward (adjusted for inflation of course).

Another advantage of a TFSA is the options you have upon your passing. In your will you can name a successor holder to your account. This essentially means that your successor holder can have 2 TFSA accounts and not have their annual contributions affected.

For more information visit:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/sccrhldr-eng.html

Lastly, you have options with a TFSA. Basically any type of investment out there qualifies to be placed in a TFSA account, including cash accounts, term deposits, mutual funds, securities, bonds etc. This means that interest, dividends, or capital gains earned on investments in a TFSA are not subject to tax.

If you would like more information on TFSA’s, please view CRA’s guide “RC4466 – Tax-Free Savings Account (TFSA), Guide for Individuals” at the following link:

http://www.cra-arc.gc.ca/E/pub/tg/rc4466/rc4466-12e.pdf

 

If you would like more information on the above we would gladly be able to assist you with your needs.